Hospitality facing “significant” recovery challenges – BPFI

SMEs such as those in the hospitality sector now face the imminent end of pandemic supports but they also face rising cost pressures which are likely to hit them hard on the road to recovery.

 

The Accommodation and Food Services sector will be one of the hardest-hit with 70% of employees in the sector receiving the Employment Wage Subsidy Scheme which is due to run out in a matter of weeks.

The Banking & Payments Federation Ireland, which represents the banking, payments and fintech sector in Ireland, published its latest SME Market Monitor recently which outlined the “rocky road to recovery” ahead for many SMEs due to cost pressures caused by inflation and the end of pandemic state supports for the majority of business at the end of the month.

Despite the wider economic recovery and the evident growth since the second half of last year, the BPFI’s Monitor highlights how this is not fully reflected in all sectors.

The banking industry report pinpoints the Accommodation and Food Services sector in particular as facing significant challenges with activity in the sector at the end of 2021 down around 15% in terms of value and 20% in terms of volume compared to the first quarter of 2020.

This performance now looks set to be further exacerbated as cost inflation continues to rise and state supports run out in a matter of weeks.

“While consumer spending rose by 5.7% year-on-year in 2021, it was 5.3% lower than in 2019,” points out the report, adding that, “Sectors providing services that rely on face-to-face contact were hard hit, especially the hospitality sectors (hotels, restaurants, bars and cafes).”

The Monitor outlines too how significant state supports have been provided to both employees and employers during the pandemic with over €7.68 billion delivered to businesses through the Employment Wage Subsidy Scheme up to the 24th of March.

Around €1.9 billion of this was accounted for by businesses in the A&FS sector.

Some 258,000 employees were on the scheme at the end of February 2022, around 10% of the total employment in the Irish economy. But the share of employees receiving EWSS in the A&FS sector was much higher, at 70%.

 

Tax debt warehousing

In addition to direct supports from the government, around 95,000 individual businesses were availing of tax debt warehousing totalling €3.1 billion by the end of February. Businesses availing of this support have until April 2023 to pay back these liabilities before interest is charged.

The Monitor also shows how nearly a third of eligible companies in the A&FS sector have warehoused their tax liabilities, the highest share across the different sectors, with the sector accounting for 13% of the total warehoused tax debt.

“With a record number of people in employment, full-year data for 2021 shows the Irish economy grew by 13.5%,” said BPFI Chief Executive Brian Hayes, “However, as our SME Monitor clearly demonstrates this recovery is not consistent across the board and many sectors, particularly businesses in the Food and Accommodation Services sector, face a difficult road to recovery as we emerge from the pandemic.

“There are two key challenges on that road, the first of which is the ending of the EWSS which has been a lifeline for many businesses over the last two years, supporting one in 10 jobs.

“Coupled with this is the soaring rate of inflation which was already running high due to supply shocks from the pandemic but is now being pushed up further due to the war in Ukraine, especially for oil and gas.

“And while rising inflation is something which will hit all sectors particularly as we see higher energy prices in the coming months, the Food and Accommodation Services sector is markedly exposed when we consider that in a matter of weeks that sector which has been so heavily reliant on the EWSS will no longer be able to avail of it.

“This is likely to feed into higher average labour costs for these businesses, mainly made up of SMEs, as well as wage growth expectations by employees due to higher consumer inflation. This, in turn, could push up prices charged by the affected sectors leading to further services inflation in the wider economy.

“As our Monitor outlines, there are different views in the markets as to how long the inflationary pressures will exist, however the European Central Bank’s most recent assessment shows that most of the current inflation will decline towards the end of this year and will be a lot lower in 2023, given that it is a supply shock; however as an economy we’ll have to live with higher price levels even if prices rise more slowly in the future.”